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In this tutorial, Matthew P Z demonstrates how to create icons in Adobe Photoshop seven using vector tools. These tools, such as rectangle, ellipse, line, and shape tools, are located in the tools bar. By choosing the ellipse tool and setting the fill color to white, you can easily draw a circle by clicking and dragging while holding down the shift key to constrain it to a perfect circle. This allows you to reproduce similar icons by utilizing the vector tools within the program.